Stage Three - Layer Analysis
Schenker's main innovation was the suggestion that music is made up of more than one layer. Schenkerian analysis attempts to show how the music that you hear is a decoration of a simpler layer just below the surface. As is explained in The Fundamental Structure Schenker proposed that an analysis can uncover successive layers deeper and deeper below the surface until a very simple layer that underpins the whole piece is found.

In stage two our grouping of the surface of the music into linear units is assisted by knowing what units we are looking for (i.e. neighbour notes, consonant skips etc.). The progressions to look out for in the deeper layers of the music are the essentially the same ones although some are more common than others. These progressions are explained in The Descent from 3, and in more detail in Three Blind Mice.

The idea of stage three of your analysis is to show larger scale linear units that connect and underpin those identified in stage two. You should therefore choose one note from each linear unit and look for linear units that connect them. You are choosing the structural note from each diminution - the one being prolonged.

Mark these notes with stems and then transfer them to a new graph.

Schenker's theory of music is a dynamic one so a diminution must either move to or from a structural note. This means that only the first or last note of each diminution
can be structural - NEVER a note from the middle of a diminution

These stemmed notes should be connected by beams to form the same sort of linear units you were marking in stage two. Remember, this is not a mechanical process - you must use your musical judgement, and knowledge of the rules of counterpoint. You are trying to show how the music can be understood as a decoration or embellishment of the notes you choose. There is a detailed commentary below.

Remember that the resulting two part counterpoint (shown in the lower of the two examples) must follow the basic rules of species counterpoint on the treatment of such things as dissonances and parallel fifths (a summary of these rules can be found here)

the two diminutions in the upper part of the first bar both prolong the harmonic unit of A flat. There is a C in both diminutions so the whole bar can be understood as decorating two repeated Cs. Notice that the linear relationship overides rhythmic considerations such as the fact that the second C is metrically weak. In the bass, A flat is the root of the harmony so is the obvious choice as the structural note from this consonant skip

the next two bars both prolong a D flat major harmony. Remember that we are looking for the simplest progression from one unit to the next, so in the top part D flat is better than either the F from the consonant skip or the A flat from the fifth progression. Using the same principles, C is the obvious choice for the top part of the A flat linear unit in bar four, so the opening four bars now can be explained as a decoration of a neighbour note progression (C - D flat - C).

between the C in the top part of bar four and the final A flat there is a consonant skip prolonging the dominant. Choosing the B flat from this diminution results in a third progression spanning the two bars, whereas choosing the G would result in a leap of a fourth. The first of these two options is the simpler and therefore the one that is chosen.